Ethiopia still needs a ‘strong hand’: PM

Ethiopian Prime Minister Hailemariam Desalegn, says the World Bank's negative view of the country's economy is wrong and says local businesses are competitive.

The World Bank is "wrong" about how hard it is to do business in Ethiopia, Hailemariam Desalegn the country's prime minister has told CNBC.

In its latest report on the country published in May 2014, the World Bank highlighted that Ethiopia had slipped in its Doing Business ranking due to deterioration in investor protection, registration of property, access to finance and competitiveness.

But in an exclusive interview with CNBC's Yousef Gamal El-din on Access Africa, Desalegn rejected the organization's latest findings saying "what the report says and what's happening on the ground are to the contrary".

With its economic output growing by an average of 10.9 percent over the past 10 years, Ethiopia is the world's 12th fastest growing economy, according to the World Bank. But growth is starting to slip and in 2012/2013, went below the two-digit mark, at 9.8 percent.

Despite the service sector having overtaken agriculture as the biggest contributor to gross domestic product – it represents 45 percent of the country's GDP - Ethiopia has, according to the World Bank, "above average restrictions on foreign equity ownership" in many sectors, particularly in the service industry. The list of prohibited sectors includes telecommunications, financial services, media, retail trade and transport.

The country will open up those sectors to international competition, just "not now", Desalegn told CNBC, "but when our local sector flexes its muscles, then we will open up, because we can compete".

Ethiopia is at the early stages of development, the prime minister went on to explain, adding that a "strong hand" from the government is therefore justified.

Georges Gobet | AFP | Getty Images

Governments in both the U.S. and U.K. had a "strong hand" in their economies "at the early stage of take-off", but now that they've matured, "they forget that they started the same way as we are doing now".

"Simply because Thatcher and Reagan announced neo-liberalism, it doesn't mean that Ethiopia is going to take it now because at this early stage of development in every transition economy, there is a huge market gap that the private sector is not able to fill". Only when the gap is filled, will the country open up those sectors, he concluded.

According to Anna Rosenberg, associate practice leader for Sub-Saharan Africa at Frontier Strategy Group, there are rumours that some multinationals have managed to find a way to circumvent those rules and bought stakes in technology companies servicing the banking industry. "That way they get through the back door", she explained.

The government's so-called strong hand has already had positive impact. As the World Bank noted, tax revenues shot up due to "vigorous tax reform measures" and changes to regulatory institutions have "improved the quality of business support and considerably reduced the cost of doing business".

Furthermore, inflation has been drastically slashed. While it stood at 39.2 percent and 15.6 percent respectively in November 2011 and 2012, it was at 7.9 percent in November 2013.

The country's road to financial credibility improved further in April when the world's top credit ratings agencies issued their first ratings, fuelling rumors that Ethiopia was gearing up for a bond issue.

Fitch and S&P both awarded Ethiopia a B rating with stable outlook while Moody's was a bit more generous with a B1 grade.

"The business environment is attractive", Anna Rosenberg continued, "as the government really wants companies to come in and invest".

However, Rosenberg adds "the opportunities are overstated". Despite the country being the second most-populous country in Africa and poverty having been reduced to 29.6 percent of the population in 2010/11 from 45.5 percent in 1995/1996, according to the World Bank, "the majority of inhabitants still have very low income levels", highlights Rosenberg.

With the country positioning itself as a manufacturing hub, Rosenberg says, it is more likely to become a bigger export market before it becomes a large consumer market.